the road to sustainable development of hong kong … kong general chamber of small and medium...

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Organizers:

August 2011

Research Report

Funded by SME Development Fund Trade and Industry Department

The Road to Sustainable Development of Hong Kong SMEs - The Present and Future

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Copyright The Hong Kong Chinese Importers & Exporters Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, for any commercial purpose without prior permission in writing from the publisher. These guidelines are available for personal use in printed books and on the website (www.hkciea.org.hk). Quotation of the contents of this publication is allowed provided that it is made with explicit reference to the source and publisher.

Any opinions, fi ndings, conclusions or recommendations expressed in this material/event (or by members of the Project team) do not reflect the views of the Government of the Hong Kong Special Administrative Region, Trade and Industry Department or the Vetting Committee for the SME Development Fund.

Published by : The Hong Kong Chinese Importers & Exporters Association

Address : Champion Building, 7-8 Floor, 287-291 Des Voeux Road Central, Hong Kong

Tel : (852) 2544-8474

Fax : (852) 2581-4979

E-mail : [email protected]

Website : www.hkciea.org.hk

First printed in Hong Kong

August 2011

3

Research Project on

The Road to Sustainable Development of Hong Kong SMEs

The Present and Future

Funded by:

SME Development Fund

Trade and Industry Department, HKSAR

Conducted by:

The Hong Kong Chinese Importers & Exporters Association

Hong Kong Baptist University, School of Business

Institute for Enterprise Development

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Supporting Organizations:

Hong Kong Auto Parts Industry Association

Hong Kong Chiu Chow Chamber of Commerce

Hong Kong General Chamber of Small and Medium Business

Hong Kong Logistics Association

Hong Kong Small and Medium Enterprises Association

Hong Kong Young Industrialists Council

New Territories General Chamber of Commerce

Ning Po Residents Association Hong Kong Limited

The Association of Hong Kong Photographic Equipment Importers Limited

The Chiu Chau Plastic Manufacturers Association Company Limited

The Federation of Hong Kong Footwear Limited

Special Acknowledgement:

Mr. Cheung Chung-Fu Director of Acctron Company Limited

Mr. Han Ping Vice President of Long Far Herbal Medicine Mfg. (HK) Ltd.

Mr. Leung Lun Chairman of Lung Cheong International Holdings Limited

Census and Statistics Department, HKSAR

The Hong Kong Exporters Association

Trade and Industry Department, HKSAR

SME Development Fund, Trade and Industry Department, HKSAR

5

The Road to Sustainable Development of Hong Kong SMEs The Present and Future

Research Project Team Members

(The Hong Kong Chinese Importers & Exporters Association)

Advisor: Mr. Chong Shing-hum (President)

The Hon. Mr. Wong Ting-kwong, BBS, JP (Legislative Councilor: Functional Constituency Import & Export)

Mr. Joseph Lee, SBS, JP (Honorary Advisor)

Mr. Rock Chen, BBS, JP (Vice President)

Project Convenor: Mr. Michael Hui, MH (Vice President)

Vice-Project Convenor: Mr. Frank Leung (Vice Hon. Secretary)

Project Promotion Coordinator: Mr. Stanley Choi (Committee Member)

Seminars Coordinator: Mr. James Leong (Committee Member)

Industry Research Coordinator: Mr. Andy Sin (Committee Member)

Treasurer: Mr. Benson To (Committee Member)

Committee Member: Mr. Edward Ng (Committee Member)

Mr. David Ho, BBS (Committee Member)

Mr. Paul Law (Committee Member)

Mr. Paul Leung (Committee Member)

Mr. Kevin Yeung (Committee Member)

Mr. Henry Wong (Member)

Mr. Peter Poon (Member)

Mr. Wong Tsz-man (Member)

Mr. Tommy Lo (Member)

Mr. Ho Fung-kwan (Member)

(Hong Kong Baptist University, School of Business)

Prof. Stephen Y.L. Cheung, BBS, JP (Dean & Professor (Chair) of Finance)

Dr. Ng Ying-chu (Acting Head, Department of Economics)

Dr. Vivienne W.M. Luk (Director, Institute for Enterprise Development)

Mrs. Kang Liew Inn-lee (Assistant Director, Institute for Enterprise Development)

7

Table of Contents

Chapter Page

1 Introduction 1

2 Survey of Hong Kong SMEs: Overall Findings 3

3 Hong Kong SMEs in the Import and Export Trade Sector 27

4 Hong Kong SMEs in the Import and Export Trade cum Manufacturing Sector 41

5 Hong Kong SMEs in the Manufacturing Sector 55

6 Hong Kong SMEs in the Services Sector 69

7 Case Studies 83

8 Conclusion 93

9 Recommendations 95

References 99

Appendices 1 Statistics of SMEs Contribution to Hong Kongs Economy from 1998 to 2010 (Table 1.1 & Table 1.2)

2 Survey Questionnaire

3 Support to SMEs by HKSAR Government Departments and Others

4 Training Programmes for SMEs

100

102

108

109

1Chapter 1

Chapter 1 Introduction

SMEs play a very signifi cant role in any economy. In Hong Kong, for at least the past ten years, more than 98% of enterprises in Hong Kong are SMEs. They may be small individually but together they employ 48% of the total working population over 1.3M employees and their combined business values was nearly 57% that of total business values in Hong Kong in 20091.

One of the main strengths of SMEs is their adaptability, but at the same time they are also more vulnerable to upheavals in the economic environment, which have not been lacking in the past two decades - the Asian fi nancial crisis of 1997, SARS outbreak and economic downturn of 2003, the global fi nancial melt-down of 2008.

In recent years, governments worldwide have begun to realise the important role they play in creating a business environment conducive to SMEs sustainable development. Government support should be distinguished from government intervention. In a signifi cant event in 2000, about fi fty OECD members and non-members signed the Bologna Small Business Charter2. Since then, governments as far apart as Japan, Mozambique, and the European Community have taken concrete actions to support SMEs in their respective countries.

The current research project is a joint effort of a tertiary institution and the SMEs in Hong Kong, more specifically, a collaboration between The Hong Kong Chinese Importers and Exporters Association (HKCIEA) and the Institute for Enterprise Development, School of Business, Hong Kong Baptist University, to explore the issues facing SMEs. It is a year-long project which started in May 2010 and is funded by the SME Development Fund, Trade and Industry Department of the HKSAR government3. The main objectives of this project are to assess how Hong Kong SMEs are coping in the turbulent economic environment, what are the challenges they face, what do they see of their future and most importantly, what can be done to provide the necessary support for their sustainable development.

The research project includes a self-administered questionnaire survey of 272 SMEs in Hong Kong to generate some quantitative data, case studies of three successful SMEs to gain in-depth insights, and six public seminars/forums for SME representatives to exchange ideas and express their views.

The project is documented in this main report which includes the overall fi ndings of the survey of SMEs in Chapter 2; the breakdown fi ndings by sector for four sectors - the Import and Export Trade Sector, Import and Export cum Manufacturing Sector, Manufacturing Sector and Services Sector in Chapter 3-6; three case studies in Chapter 7 and in the last chapter, recommendations are put forward which incorporate views and suggestions of Hong Kong SMEs expressed in the public seminars and forums.

1 See Table in Appendix 1 SMEs Contribution to Hong Kongs Economy from 1998 2010, Census and Statistics Department, HKSAR Government

2 http://www.oecd.org/document/29/0,3343,en_2649_34197_1809105_1_1_1_1,00.html3 http://www.smefund.tid.gov.hk/eng/sdf.html

3Chapter 2

Chapter 2Survey of Hong Kong SMEs: Overall Findings

A survey of SMEs in Hong Kong was conducted as part of the project to obtain SMEs view of their current status and future prospects. The surveyed SMEs were asked about factors infl uencing their current business, diffi culties in doing business in Hong Kong and diffi culties in doing business in mainland China, strategies being adopted and their perceived effectiveness. They were also asked their views on HKSAR government and mainland policies for SMEs.

The survey targeted SMEs in Hong Kong in four selected sectors, namely, Import and Export Trade Sector, Manufacturing Sector, Import and Export Trade cum Manufacturing Sector, and Services Sector.

2.1 Survey Method The survey was conducted by means of a self-administered questionnaire in Chinese (Appendix 2) sent by post and email through the Hong Kong Chinese Importers and Exporters Association and the Institute for Enterprise Development of Hong Kong Baptist University to SME and business associations in Hong Kong. A total of 1,812 questionnaires were distributed between July and August of 2010. Follow-up reminders by post, email and phone calls were made, and 272 usable questionnaires were collected by the end of August 2010, making an overall response rate of 15 %.

2.2 Profi le of Responding SMEsThe responding SMEs are distributed among the different sectors as follows:

Table 2.1 Responding SMEs by Sector

Sector No. of SMEs Percentage

Import and Export Trade 81 29.8%

Import/Export Trade cum Manufacturing 69 25.4%

Manufacturing 64 23.5%

Services 48 17.6%

Others 10 3.7%

Total 272 100.0%

A wide spectrum of industries is represented in the sample. Responding SMEs of the Import and Export Trade sector, Import and Export Trade cum Manufacturing sector, and Manufacturing sector are engaged in the following industries: biochemical technology, food, electronic & electrical appliances, machinery & equipment, jewellery, fabricated metal products, plastic, printing & publishing, textile & garments, toys, watches & clocks, automobiles, building materials, furniture and home furnishings, decoration and gift items, stationery, shoes & handbags, medical, health and eco-protection products, etc.

Respondents of the Services sector are engaged in information technology, transport and logistics, financial service, medical service, accounting service, legal service, social service, education, architecture and interior design, hotel and tourism, food and catering, real estate and property management services, etc.

4

The Road to Sustainable of Development of Hong Kong SMEs The Present and Future

Chapter 2

Majority of the surveyed SMEs employ fewer than 50 employees. Distribution of SMEs by number of employees is shown in Table 2.2.

Table 2.2 Number of Employees

Employee Size Number of SMEs Percentage

100 18 6.6%

Total 272 100.0%

About 85% of the respondent SMEs have been in operation for more than 5 years. Distribution of the SMEs by years of establishment is as follows:

Table 2.3 Years of Establishment

Years of Establishment Number of SMEs Percentage

15 158 58.1%

Unknown 1 0.4%

Total 272 100.0%

5Chapter 2

2.3 Business PerformanceThe survey was conducted in 2010, not long after the global fi nancial crisis of 2008, and the SMEs were asked to compare their current business performance to that before the fi nancial crisis, that is, before and after 2008. Figure 2.1 shows that 36.6% of the responding SMEs actually saw an increase in sales over the period although profi tability did not match the sales increase only 21.9% saw their profi t increased, and the corresponding fi gure for return on assets was only 15.4%. Given the fact that the 2008 fi nancial crisis hit hardest on the US and European economies, this shows that these enterprises are no longer solely dependent on the traditional US and European markets. Another reason is that most of the SMEs in Hong Kong have established and expanded a major part of their businesses in mainland China which achieved a GDP increase over the 2008 fi nancial crisis period. At the same time, the strong growth momentum in Asia and the gradual recovery of the global economy also offer better business opportunities for SMEs in Hong Kong.

Figure 2.1 Change in Business Performance Compared to Pre-fi nancial Crisis

41.7%

42.9%

15.4%

47.2%

30.9%

21.9%

35.5%

27.9%

36.6%

Decrease

No change

Increase

Change in sales (N=265)

Change in profit (N=256)

Change in returns on assets (N=240)

6


Chapter 2

Table 2.4 shows that for those SMEs that recorded better business performance, the average percentage increase in sales, profi t and return on assets were 24.3%, 29.2% and 20.3% respectively. Table 2.5 gives the corresponding fi gures for those that recorded a decline in sales, profi t and return on assets.

Table 2.4 Increase in Sales, Profi t and Returns on Assets Compared to Pre-fi nancial Crisis

Percentage increase in

Sales Profi t Return on assets

(N=84) (N=50) (N=30)

Minimum 2.0% 1.0% 1.0%

Maximum 100.0% 500.0% 100.0%

Mean 24.3% 29.2% 20.3%

Table 2.5 Decrease in Sales, Profi t and Returns on Assets Compared to Pre-fi nancial Crisis

Percentage decrease in


(N=82) (N=99) (N=82)

Minimum 5.0% 2.0% 1.0%

Maximum 100.0% 100.0% 102.0%

Mean 28.0% 26.0% 26.0%

7Chapter 2

2.4 Three-year Business ProjectionThe SMEs surveyed were asked to make forecasts for the next 3 years. Figure 2.2 shows that 52.0% of them held optimistic or very optimistic outlook of their business and only 10.0% were pessimistic or very pessimistic.

Figure 2.2 Projection of Next Three Years Business

N=271

10.0%

38.0%

52.0%

Very optimistic / Optimistic

Neutral

Very pessimistic / Pessimistic

Respondents were asked to project future expansions in Hong Kong, mainland China and overseas respectively (Figure 2.3) and the fi ndings show that 46.7% have plans to expand in mainland China and and 34.0% indicated plans to expand overseas in the coming three years.

Figure 2.3 Projection of Next Three Years Business in Hong Kong, mainland China and Overseas

4.4%

61.6%

34.0%

10.5%

42.8%

46.7%

12.3%

56.9%

30.8%

Plan to cut businessoperations

No change

Plan to expand business

In Hong Kong (N=269)

In mainland China (N=257)

Overseas (N=229)

8


Chapter 2

Results reveal that 54.9% of the responding SMEs would develop new markets to expand their businesses, as shown in Figure 2.4. They plan to develop new markets in mainland China and foreign countries, such as the Philippines, Vietnam, Thailand, Indonesia, ASEAN regions, USA and Europe.

Figure 2.4 Plan to Develop New Markets in the Next Three Years

N=182

45.1%

54.9%

Plan to develop new markets

No plan to develop new markets

9Chapter 2

2.5 Factors Infl uencing the Current BusinessThe responding SMEs were presented with eight external factors deemed to have impact on business. Overwhelmingly, policies of the mainland government is considered of greatest impact with 74.0% rating this factor of signifi cance or of great signifi cance. This is followed by 55.6% for the factor fl uctuations of exchange rates, as shown in Table 2.6a. This fi nding is consistent with the fact that many SMEs are engaged in mainland-related businesses and these would be their main concern. The comparison of the external factors deemed to impact on respondents business by the four sectors is illustrated in Figure 2.6b on page 10.

Table 2.6a Perceived Impact of External Factors on Business (Overall)

External Factor Deemed to Impact Business

SMEs rating the specifi c factor to be of great signifi cance or of signifi cance

Number of SMEs Percentage

Policies of mainland government (N=250) 185 74.0%

Fluctuations of exchange rates (N=250) 139 55.6%

Debt crisis in Europe (N=245) 103 42.0%

RMB clearing and settlement procedure (N=241) 100 41.5%

Expansion of mainland domestic market (N=239) 69 28.9%

The establishment of free trade zone between China and ASEAN (N=204)

28 13.7%

Pan-Pearl River Delta development (N=196)( )

18 9.2%

CEPA Policies (N=208) 15 7.2%

10


Chapter 2

Table 2.6b Perceived Impact of External Factors on Business (By Sector)


Import and Export Trade

(N=81)

Import and Export Trade cum

Manufacturing(N=69)

Manufacturing(N=64)

Services(N=48)

Policies of mainland government 68.1% 80.6% 83.3% 65.9%

Fluctuations of exchange rates 56.2% 67.2% 56.7% 40.0%

Debt crisis in Europe 43.7% 54.5% 29.8% 41.5%

RMB clearing and settlement procedure 37.5% 46.0% 40.4% 41.0%

Expansion of mainland domestic market 31.0% 25.4% 28.8% 27.0%

The establishment of free trade zone between China and ASEAN

14.5% 9.3% 13.7% 20.6%

Pan-Pearl River Delta Development( )

10.3% 3.6% 13.6% 6.7%

CEPA Policies 8.3% 1.8% 8.2% 11.4%

11Chapter 2

Table 2.7a below shows factors that were unclear to the responding SMEs. Top of the list is 27.1% who were not clear about the Pan-Pearl River Delta development ( ) , followed by 23.0% who were unclear about the establishment of the free trade zone between China and ASEAN, and 22.7% who were not clear about CEPA policies. This shows the need for SMEs to be kept well informed and educated about new development in the macro economic and business environment and policies. Table 2.7b presents the factors which are unclear to the respondents by the four sectors.

Table 2.7a External Factors which are Unclear to SMEs (Overall)

External Factor unclear to SMEs Number of SMEs Percentage


73 27.1%

Establishment of free trade zone between China and ASEAN (N=265) 61 23.0%

CEPA policies (N=269) 61 22.7%


Table 2.7b External Factors which are Unclear to SMEs (By Sector)



(N=81)


Manufacturing (N=69)

Manufacturing(N=64)

Services(N=48)

Pan-Pearl River Delta development ( )

28.4% 20.3% 29.0% 36.2%

Establishment of free trade zone between China and ASEAN

29.5% 19.4% 19.0% 27.7%

CEPA policies 25.0% 20.3% 22.2% 25.5%

Expansion of mainland domestic market

12.3% 7.4% 7.8% 21.3%

12


Chapter 2

2.6 Diffi culties in Doing Business in Hong KongRespondents were asked to assess a list of six factors that present diffi culties in doing business in Hong Kong. Top of the list is RMB exchange rate fl uctuations 57.8% of the responding SMEs considered this a serious or extremely serious problem, followed by rising rental costs 51.9%, as indicated in Figure 2.5a.

Over 40% of the respondents considered fl uctuations of market conditions and loss of competent employees a serious or extremely serious problem. Though last on the list, fl ow of funds between Hong Kong and Mainland and access to bank loans are diffi culties faced by over 25.0% of SMEs. These concerns are to be addressed if SMEs are to thrive.

Figure 2.5a Diffi culties Experienced by SMEs in Doing Business in Hong Kong (Overall)

25.2%

29.6%

43.4%

47.7%

51.9%

57.8%

Difficul ties rated as very serious

RMB exchange rate fl uctua ons (N=270)

Rising rental costs (N=264)

Fluctua ons of market condi ons (N=266)

Loss of competent employees (N=265)

Flow of funds between Hong Kong and Mainland (N=264)

Access to bank loans (N=266)

13Chapter 2

The comparison of the difficulties experienced by respondents of the four sectors in doing business in Hong Kong is illustrated in Figure 2.5b below:

Figure 2.5b Diffi culties Experienced by SMEs in Doing Business in Hong Kong (By Sector)

34.0%

22.9%

57.4%

37.0%

68.8%

27.7%

19.0%

27.9%

44.3%

50.8%

38.3%

68.8%

26.9%

31.3%

47.1%

55.1%

46.3%

76.8%

24.1%

33.3%

31.6%

47.5%

53.2%

47.5%

Import & Export Trade (N=81)Import & Export Trade cum Manufacturing (N=69)Manufacturing (N=64)Services (N=48)

RMB exchange rate fluctuations

Rising rental costs

Fluctuations of market conditions

Loss of competent employees

Flow of funds between Hong Kong and Mainland

Access to bank loans

14


Chapter 2

2.7 Diffi culties in Doing Business in Mainland ChinaSimilarly, respondents were asked to assess factors that present diffi culties in doing business in the mainland. As shown in Figure 2.6a, the fi rst two on the list are costs related, including rising raw material costs, rising wages. But many are also concerned about the government policies and regulations and their implementation, such as the labour contract law, the effectiveness in implementing laws and regulations, introduction of environmental protection laws and regulations protection of intellectual property rights, and a fair and equitable business environment, as well as shortage of factory workers. All these indicate that the mainland business environment is not yet fully developed and mature. Hong Kong SMEs are exposed to higher risks when doing business in China.

The last two factors on the list, though of concern to fewer enterprises, are still considered by one quarter of the responding SMEs as presenting challenges. One is the competency of Chinese professionals, e.g. in the legal and accountancy profession, and the other is the access to bank loans in the mainland. The former concern should represent good news to Hong Kong professionals who may still have an advantage over their Chinese counterparts. The analysis of the diffi culties experienced by respondents of the four sectors in doing business in the Mainland is shown in Figure 2.6b on page 15.

Figure 2.6a Diffi culties Experienced by SMEs Doing Business in the Mainland (Overall)

25.8%

31.3%

40.6%

43.1%

45.8%

50.6%

52.8%

58.6%

59.1%

71.5%

74.8%


Rising raw materials costs (N=254)

Rising wages (N=256)

Unclear policy (N=252)

Implementation of labour contract law (N=251)

Shortage of workers (N=250)

Effectiveness in implementing laws and regulations (N=251)

Environmental protection laws and regulations (N=251)

Protection on intellectual property rights (N=253)

A fair and equitable business environment (N=254)

Competency of the Chinese professionals (N=252)

Obtaining bank loans in the Mainland (N=248)

15Chapter 2

Figure 2.6b Diffi culties Experienced by SMEs Doing Business in the Mainland (By Sector)

28.6%

46.5%

41.9%

35.7%

19.5%

44.2%

17.1%

34.9%

51.2%

56.1%

37.5%

21.7%

33.3%

42.6%

42.6%

55.6%

56.5%

68.3%

76.2%

68.9%

79.4%

85.7%

31.8%

28.4%

41.8%

45.6%

63.2%

58.2%

70.6%

74.6%

72.1%

88.2%

92.6%

22.5%

23.3%

40.5%

46.6%

37.1%

42.9%

43.5%

42.0%

46.5%

57.3%

67.6%


Rising raw materials costs

Rising wages

Unclear policy

Implementation of labour contract law

Shortage of workers

Effectiveness in implementing laws and regulations

Environmental protection laws and regulations

Protection on intellectual property rights

A fair and equitable business environment

Competency of the Chinese professionals

Obtaining bank loans in the Mainland

16


Chapter 2

2.8 Coping Strategies Adopted by Hong Kong SMEs in Import and Export Trade Sector The study examined the strategies adopted by SMEs to cope with the challenges and the effectiveness of these strategies. Overwhelmingly, the responding SMEs have adopted market and new product development strategies. These include developing new markets, brand development, product development through R&D, providing more employee benefi ts and training to retain their staff, and restructuring, as shown in Table 2.8a. The analysis of the strategies adopted by responding SMEs to cope with challenges by the four sectors is presented in Table 2.8b on page 17.

Table 2.8a Strategies Adopted by SMEs to Cope with Challenges (Overall)

Adopted Strategy(N = 270)

Number of SMEs which adopted

strategyPercentage

New markets development 245 90.7%

Increase employee benefi ts and offer more employee training 220 81.5%

Brand development 212 78.5%

R&D (Develop new product or services) 200 74.1%

R&D (Improve production process) 183 67.8%

Restructuring 166 61.5%

Cost reduction through outsourcing 152 56.3%

Cost reduction through localisation 149 55.2%

Cost reduction through downsizing 127 47.0%

Horizontal Integration 118 43.7%

Vertical Integration 117 43.3%

Relocation ( ) 75 27.8%

17Chapter 2

Table 2.8b Strategies Adopted by SMEs to Cope with Challenges (By Sector)

Adopted StrategyImport and Export

Trade(N=81)


Manufacturing(N=69)

Manufacturing(N=64)

Services(N=48)

New markets development 90.1% 91.3% 96.9% 81.3%

Increase employee benefi ts and offer more employee training

77.8% 81.2% 89.1% 79.2%

Brand development 76.5% 85.5% 73.4% 81.3%

R&D (Develop new product or services) 63.0% 91.3% 82.8% 56.3%

R&D (Improve production process) 49.4% 87.0% 85.9% 45.8%

Restructuring 51.9% 65.2% 70.3% 58.3%

Cost reduction through outsourcing 39.5% 76.8% 68.8% 41.7%

Cost reduction through localisation 42.0% 68.1% 64.1% 50.0%

Cost reduction through downsizing 46.9% 47.8% 57.8% 33.3%

Horizontal Integration 42.0% 49.3% 34.4% 54.2%

Vertical Integration 40.7% 49.3% 39.1% 47.9%

Relocation ( ) 24.7% 31.9% 31.3% 29.5%

18


Chapter 2

Results show that 48.6%-56.3% of those SMEs who adopted the strategy found them effective or very effective, see Table 2.9a. This is an encouraging fi nding as it shows that Hong Kong SMEs are making effort for continuous improvement to build competitive advantage. The breakdowns of analysis by sector are shown in Table 2.9b on page 19.

Table 2.9a Effectiveness of the Strategy Adopted by SMEs (Overall)

Adopted StrategyNumber of SMEs

which fi nd the strategy effective

Percentage

R&D (Improve production process) (N=183) 103 56.3%

R&D (Develop new product or services) (N=200) 112 56.0%

New markets development (N=245) 130 53.1%

Restructuring (N=166) 85 51.2%

Brand development (N=212) 103 48.6%

Cost reduction through outsourcing (N=152) 63 41.4%

Vertical Integration (N=117) 44 37.6%

Increase employee benefi ts and offer more employee training (N=220) 82 37.3%

Relocation ( ) (N=75) 27 36.0%

Horizontal Integration (N=118) 42 35.6%

Cost reduction through downsizing (N=127) 45 35.4%

Cost reduction through localisation (N=149) 48 32.2%

19Chapter 2

Table 2.9b Effectiveness of the Strategy Adopted by SMEs (By Sector)

Adopted StrategyImport and

Export Trade(N=81)


Manufacturing(N=69)

Manufacturing(N=64)

Services(N=48)

R&D (Improve production process) 57.5% 48.3% 63.6% 63.6%

R&D (Develop new product or services) 58.8% 52.4% 58.5% 59.3%

New markets development 61.6% 42.9% 48.4% 64.1%

Restructuring 59.5% 42.2% 55.6% 53.6%

Brand development 51.6% 32.2% 51.1% 71.8%

Cost reduction through outsourcing 28.1% 35.8% 59.1% 40.0%

Vertical Integration 45.5% 26.5% 32.0% 47.8%

Increase employee benefi ts and offer more employee training

36.5% 30.4% 29.8% 60.5%

Relocation( ) 55.0% 31.8% 35.0% 15.4%

Horizontal Integration 35.3% 29.4% 36.4% 42.3%

Cost reduction through downsizing 36.8% 36.4% 32.4% 37.5%

Cost reduction through localisation 32.4% 27.7% 26.8% 50.0%

20


Chapter 2

2.9 Awareness and Effectiveness of HKSAR Government Schemes for SMEsTable 2.10a shows that many of the responding SMEs are not aware of HKSAR government schemes designed to assist SMEs. For example, 57.2% are not aware of the R&D Cash Rebate Scheme and 55.7% do not know about the SME business Installations and Equipment Guarantee Scheme. Table 2.10b presents the fi ndings by the four sectors.

Table 2.11a shows that only up to 50.9% of them who are aware of the schemes found them effective. The government could do more to ensure the dissemination of such information to SMEs. The schemes also need reworking periodically so that they could better address the needs of SMEs. The analysis by the four sectors is illustrated in Table 2.11b.

Table 2.10a Lack of Awareness of HKSAR Government Schemes for SMEs (Overall)

HKSAR Government Scheme for SMEs(N = 271)

Number of SMEs not aware of scheme

Percentage

R&D Cash Rebate Scheme 155 57.2%

SME Business Installations and Equipment Loan Guarantee Scheme 151 55.7%

Special Loan Guarantee Scheme 118 43.5%

Manpower Training and Development 113 41.7%

SME Development Fund 113 41.7%

SME Export Marketing Fund 87 32.1%

SME Loan Guarantee Scheme 79 29.2%

21Chapter 2

Table 2.10b Lack of Awareness of HKSAR Government Schemes for SMEs (By Sector)

HKSAR Government Scheme for SMEs


(N=81)


Manufacturing(N=69)

Manufacturing(N=64)

Services(N=48)

R&D Cash Rebate Scheme 63.0% 42.0% 64.1% 61.7%

SME Business Installations and Equipment Loan Guarantee Scheme

58.0% 52.2% 51.6% 61.7%

Special Loan Guarantee Scheme 49.4% 31.9% 42.2% 48.9%

Manpower Training and Development 43.2% 42.0% 42.2% 38.3%

SME Development Fund 46.9% 26.1% 46.9% 44.7%

SME Export Marketing Fund 38.3% 17.4% 34.4% 36.2%

SME Loan Guarantee Scheme 32.1% 17.4% 28.1% 38.3%

Table 2.11a Effectiveness of HKSAR Government Schemes for SMEs (Overall)


Number of SMEs which found the scheme effective

Percentage








22


Chapter 2

Table 2.11b Effectiveness of HKSAR Government Schemes for SMEs (By Sector)

HKSAR Government Scheme for SMEs


(N=81)


Manufacturing(N=69)

Manufacturing(N=64)

Services(N=48)

SME Loan Guarantee Scheme 51.9% 60.9% 50.0% 42.6%

SME Export Marketing Fund 49.4% 63.8% 46.9% 44.7%

SME Development Fund 38.3% 56.5% 34.4% 34.0%

Special Loan Guarantee Scheme 37.0% 46.4% 35.9% 31.9%

Manpower Training and Development 30.9% 30.4% 32.8% 38.3%

SME Business Installations and Equipment Loan Guarantee Scheme

30.9% 29.0% 28.1% 21.3%

R&D Cash Rebate Scheme 19.8% 37.7% 17.2% 19.1%

23Chapter 2

2.10 Government Support for the Sustainable Development of SMEsFigure 2.7a lists, in order of priority, areas where SMEs think HKSAR government can assist them. These include providing tax relief and avenues to access mainland markets, facilitating market promotion and providing useful market information, expanding the RMB exchange scheme and subsidise R&D activities.

About 37% of the responding SMEs expressed the need for government assistance in the areas of intellectual property rights and international law. These involve specialised knowledge that is outside the capability of SMEs and is best provided by a centralised body through the government.

Figure 2.7a Areas of Support by HKSAR Government to Assist SMEs Sustainable Development (Overall)

N=272

26.1%

27.2%

31.6%

37.1%

37.5%

40.4%

47.1%

47.8%

50.7%

60.3%Provide tax relief

Provide avenues to access mainland markets

Facilitate market promo on & provide useful market informa on

Expand coverage of RMB exchange scheme

Subsidise R&D ac vi es

Assist in gaining intellectual property rights

Provide assistance in interna onal law

Promote enterprise clusters

Subsidise patent applica on

Provide tax relief for capital equipment deprecia on

24


Chapter 2

Figure 2.7b shows the areas of support by HKSAR Government to assist the sustainable development of SMEs by sector.

Figure 2.7b Areas of Support by HKSAR Government to Assist SMEs Sustainable Development (By Sector)

27.1%

22.9%

35.4%

45.8%

39.6%

33.3%

45.8%

43.8%

41.7%

66.7%

29.7%

34.4%

31.2%

37.5%

29.7%

51.6%

46.9%

45.3%

53.1%

53.1%

36.2%

31.9%

34.8%

33.3%

49.3%

46.4%

58.0%

52.2%

60.9%

63.8%

12.3%

21.0%

28.4%

33.3%

33.3%

30.9%

40.7%

50.6%

46.9%

54.3%


Provide tax relief


Facilitate market promotion & provide useful market information


Subsidise R&D activities


Provide assistance in international law


Subsidise patent application

Provide tax relief for capital equipment depreciation

25Chapter 2

N=268

43.7%

44.0%

49.6%

51.1%

51.9%

73.5%

Simplify approval and regulatory procedures

Protect intellectual property rights

Improve access to mainland markets

Provide mainland market information

Expand coverage of RMB clearing and settlement

Expand capital flow of RMB

Figure 2.8a shows areas of major concerns regarding Hong Kong SMEs development in the Mainland. SMEs ranked assistance in simplifying approval and regulatory procedures as the most crucial for them to do business in China.

In expanding their mainland market, SMEs would appreciate protection of intellectual property rights and gaining more access to Mainland markets and market information. Expanding the coverage of RMB clearing and settlement and RMB capital fl ow will also need to be addressed.

Figure 2.8a Areas of Concern to be Addressed by Mainland Government (Overall)


26

Figure 2.8b lists areas of concern to be addressed by Mainland Government proposed by responding SMEs by sector.

Figure 2.8b Areas of Concern to be Addressed by Mainland Government (By Sector)

2.11 SummaryThe fi ndings reveal that 64.5% of the responding SMEs experienced an increase or no change in sales by mid 2010 when the survey was conducted, which means many were not as adversely affected by the 2008 fi nancial tsunami as expected. Moreover, 52% SMEs were optimistic or very optimistic about business in the next three years and only 10% are pessimistic or very pessimistic. Over 46% indicated plans to expand operations in mainland China while 34% planned to expand their business overseas and 30.8% would expand in Hong Kong. Although majority were positive about the outlook, nevertheless, they all faced many challenges, including rising costs, shortage of factory workers in their Chinese factories, unclear Mainland government policies and fl uctuation of exchange rates, etc.

The following four chapters give detailed analysis of the four selected sectors of this survey, namely, Import and Export Trade Sector, Manufacturing Sector, Import and Export Trade cum Manufacturing Sector and Services Sector.

44.7%

42.6%

44.7%

38.3%

46.8%

61.7%

38.7%

37.1%

54.8%

56.5%

56.5%

80.6%

52.2%

53.6%

49.3%

56.5%

56.5%

76.8%

38.3%

40.7%

48.1%

49.4%

44.4%

70.4%


Simplify approval and regulatory procedures






Chapter 2

27Chapter 3

Chapter 3Hong Kong SMEs in the Import and Export Trade Sector

This chapter presents the fi ndings of 81 responding SMEs surveyed in the Import and Export Trade sector.

3.1 Profi le of the Surveyed SMEs in the Import and Export Trade SectorA total of 81 SMEs in the Import and Export Trade sector responded to the survey. They are engaged in the following industries: biochemical technology, food, electronic & electrical appliances, machinery & equipment, jewellery, plastic, printing & publishing, textile & garments, toys, watches & clocks, automobiles, shoes, handbags, gift items, building materials, , stationery, products for health, eco-protection, beauty and skin care, etc.

Table 3.1 shows that over 90% of the responding SMEs employ 50 or fewer employees while 53.1% employ 10 or fewer staff in Hong Kong.



100 2 2.5%

Total 81 100.0%

About 81.5% of the SMEs surveyed have been in operation for more than 5 years and 55.6% for more than 15 years (Table 3.2).



15 45 55.6%

Unknown 1 1.2%

Total 81 100.0%

28


Chapter 3

3.2 Business PerformanceThe survey was conducted in 2010, not long after the global fi nancial crisis of 2008, and the SMEs were asked to compare their current business performance to that before the fi nancial crisis. Figure 3.1 shows that 39.0% of the responding SMEs actually saw an increase in sales over the period although profi tability did not match the sales increase only 23.0% saw their profi t increased and the corresponding fi gure for return on assets was only 13.1%.

It would appear the 2008 fi nancial crisis did not adversely affect the sales of the majority of these SMEs in the Import and Export Trade sector those which experienced an increase or no change in sales make up 72.7% of all enterprises (corresponding fi gures for profi t is 58.1% and for return on assets 63.8%). Given the fact that the 2008 fi nancial crisis hit hardest on the US and European economies, this shows that these enterprises are no longer solely dependent on the traditional US and European markets.


36.2%

50.7%

13.1%

41.9%

35.1%

23.0%

27.3%

33.7%

39.0%

Decrease

No change

Increase




29Chapter 3

Table 3.3 shows that for those SMEs that recorded better business performance, the average percentage increase in sales, profi t and return on assets were 22.0%, 16.2% and 21.3% respectively. Table 3.4 gives the corresponding fi gures for those that recorded a decline in sales, profi t and return on assets.




(N=28) (N=17) (N=8)

Minimum 2.0% 2.0% 5.0%

Maximum 70.0% 50.0% 75.0%

Mean 22.0% 16.2% 21.3%




(N=19) (N=23) (N=18)

Minimum 10.0% 2.0% 2.0%

Maximum 100.0% 100.0% 100.0%

Mean 36.1% 31.8% 30.2%

30


Chapter 3

3.3 Three-year Business ProjectionThe SMEs surveyed were asked to make forecasts for the next 3 years. Figure 3.2 shows that majority of the SMEs sampled held optimistic or very optimistic outlook of their business and only 10.0% were pessimistic or very pessimistic.


N=80

10.0%

35.0%

55.0%Very optimistic / Optimistic

Neutral


4.8%

60.3%

34.9%

8.0%

42.7%

49.3%

15.2%

48.1%

36.7%


No change


In Hong Kong (N=79)


Overseas (N=63)

The respondents were asked to project future expansions in Hong Kong, mainland China and overseas. Figure 3.3 shows that majority of them would expand their business in mainland China and overseas.


31Chapter 3

N=53

47.2%

52.8%




32


Chapter 3

3.4 Factors Infl uencing the Current BusinessThe responding SMEs were presented with eight external factors deemed to have impact on business. Overwhelmingly, policies of the mainland government is considered of greatest impact with 68.1% rating this factor of signifi cance or of great signifi cance. This is followed by 56.2% for the factor fl uctuations of exchange rates as shown in Table 3.5. This fi nding is consistent with the fact that many SMEs are engaged in mainland-related businesses and these would be their main concern.

Table 3.5 Perceived Impact of External Factors on Business










8 14.5%


6 10.3%


Table 3.6 shows factors that were unclear to the responding SMEs. Top of the list are 29.5% who were unclear about the establishment of the free trade zone between China and ASEAN, followed by 28.4% not clear about the Pan-Pearl River Delta development ( ) and 25% who were not clear about CEPA policies. This shows the need for SMEs to be kept well informed and educated about new development in the macro economic and business environment and policies.

Table 3.6 External Factors which are Unclear to SMEs




23 28.4%


33Chapter 3

3.5 Diffi culties in Doing Business in Hong KongRespondents were asked to assess a list of six factors that present diffi culties in doing business in Hong Kong. Top of the list is rising rental cost 53.2% of the responding SMEs considered this a serious or extremely serious problem as indicated in Figure 3.5. Rental is a refl ection of property prices. Businesses will be hard squeezed if the rise in property prices is not curbed.

Although down in the list, nearly one third, namely 31.6% of the enterprises considered loss of competent employees a serious or extremely serious problem as indicated in Figure 3.5. Similarly, though last on the list, access to bank loans is a diffi culty faced by a signifi cant 24.1% of SMEs. These concerns are to be addressed if SMEs are to thrive.

Figure 3.5 Diffi culties Experienced by SMEs in Doing Business in Hong Kong

1

4 Subject to external economic conditions

24.1%

31.6%

33.3%

47.5%

47.5%

53.2%



Fluctua on of market condi ons4 (N=80)

RMB exchange rate fl uctua ons (N=80)




34


Chapter 3

3.6 Diffi culties in Doing Business in Mainland ChinaSimilarly, respondents were asked to assess factors that present diffi culties in doing business in the mainland. As shown in Figure 3.6, the fi rst two on the list are costs-related, including rising raw material costs and rising wages and the related issue of shortage of factory workers. But many are also concerned about the business environment in terms of protection of intellectual property rights, clarity of policies and regulations and their implementation. Businesses are exposed to higher risks and costs when doing business in China.

The last two factors on the list, though of concern to fewer enterprises, are still considered by one fi fth of the responding SMEs as presenting challenges. One is the competency of Chinese professionals, e.g. in the legal and accountancy profession, and the other is the access to bank loans in the mainland. The former concern should represent good news to Hong Kong professionals who may still have an advantage over their Chinese counterparts.

Figure 3.6 Diffi culties Experienced by SMEs Doing Business in the Mainland

22.5%

23.3%

37.1%

40.5%

42.0%

42.9%

43.5%

46.5%

46.6%

57.3%

67.6%



Rising wages (N=75)










35Chapter 3

3.7 Coping Strategies Adopted by Hong Kong SMEs in Import and Export Trade Sector The study made an attempt to look at the strategies adopted by SMEs to cope with the challenges and the effectiveness of these strategies.

Overwhelmingly, SMEs in the Import and Export Trade sector have adopted market development strategies rather than cost-cutting strategies. These include developing new markets, brand development, product development through R&D, as shown in Table 3.7. In each of these, 50-60% of those who adopted the strategy found them effective or very effective, see Table 3.8. This is an encouraging fi nding as it shows that Hong Kong SMEs are trying to build competitive advantage.

Cost reduction strategies such as reducing the number of employees, localisation and outsourcing, are adopted by over 40% of the responding SMEs but those who found them effective are only in the region of 30%.

Table 3.7 Strategies Adopted by SMEs to Cope with Challenges


Number of SMEs which adopted strategy

Percentage













36


Chapter 3

Table 3.8 Effectiveness of the Strategy Adopted by SMEs

Adopted StrategyNumber of SMEs which

fi nd the strategy effectivePercentage





Relocation ( ) (N=20) 11 55.0%




Increase employee benefi ts and offer more employee training (N=63)

23 36.5%




37Chapter 3

3.8 Awareness and Effectiveness of HKSAR Government Schemes for SMEsTable 3.9 shows that many of the responding SMEs are not aware of HKSAR government schemes designed to assist SMEs. For example, 38.3% are not aware of the SME Export Marketing Fund which would be of direct relevance to the enterprises in the Import/Export Trade sector. Table 3.10 shows that not all who are aware of the schemes found them effective. There is much room for improvement to fi rst of all make these government schemes known to SMEs, and secondly make the schemes more effective in design.

Table 3.9 Lack of Awareness of HKSAR Government Schemes for SMEs



Percentage








Table 3.10 Effectiveness of HKSAR Government Schemes for SMEs



Percentage








38


Chapter 3

3.9 Government Support for the Sustainable Development of SMEsFigure 3.7 lists, in order of priority, areas where SMEs think HKSAR government can assist them. Surprisingly, not everyone is asking for an outright tax relief or expanding the RMB exchange scheme as one would expect. Rather, SMEs are concerned about providing useful and accessible market information, market promotion and networking platform, especially of Mainland markets.

About 30% of the responding SMEs expressed the need for government assistance in the areas of intellectual property rights and international law. These involve specialised knowledge that is outside the capability of SMEs and is best provided by a centralised body through the government.

Figure 3.7 Areas of Support by HKSAR Government to Assist SMEs Sustainable Development

N=81

12.3%

21.0%

28.4%

30.9%

33.3%

33.3%

40.7%

46.9%

50.6%











39Chapter 3

Figure 3.8 shows areas of major concerns regarding Hong Kong SMEs development in the Mainland. SMEs would appreciate assistance in simplifying approval and regulatory procedures which is crucial to doing business in China.

In light of the expanding mainland market, SMEs are anxious to gain access to the mainland market e.g. through the setting up a platform of market information and networking. Related problems such as protection of the intellectual property rights, expanding the coverage and volume of RMB settlement and RMB capital fl ow will need to be addressed.

Figure 3.8 Areas of Concern to be Addressed by Mainland Government

3.10 SummaryFindings of the survey show that about 55% of the 81 SMEs in the Import and Export Trade sector were optimistic or very optimistic about their business prospect in the next three years, and only 10% were pessimistic or very pessimistic with the rest being neutral. Although many of them felt that the outlook is positive, nevertheless, they all faced many challenges, including rising rental costs, exchange rate fluctuations, fluctuation of market conditions, unclear government policies, access to bank loans, etc.

N=81

38.3%

40.7%

44.4%

48.1%

49.4%

70.4%Simplify approval and regulatory procedures






41Chapter 4

Chapter 4Hong Kong SMEs in the Import and Export Trade cum Manufacturing

Sector

This chapter presents the fi ndings of 69 responding SMEs surveyed in the Import and Export Trade cum Manufacturing sector.

4.1 Profi le of the Surveyed SMEs in the Import and Export Trade cum Manufacturing Sector

The 69 SMEs in the Import and Export Trade cum Manufacturing sector are engaged in the following industries: biochemical technology, food, electronic & electrical appliances, jewellery, fabricated metal products, plastic, printing & publishing, textile & garments, toys, watches & clocks, furniture and home furnishing, shoes, stationery, decoration and gift items, medical and eco-protection products.

Table 4.1 shows that almost 90% of the responding SMEs employ 50 or fewer employees while only about 10% employ more than 50 staff in Hong Kong.


Employee Size Number of SMEs Percentage 100 3 4.3% Total 69 100.0%

About 74% of the SMEs surveyed have been in operation for more than 15 years, 17.4% from 6 to 15 years, and 8.7% for 5 to less than 5 years (Table 4.2).



15 51 73.9% Total 69 100.0%

42


Chapter 4

4.2 Business PerformanceThe survey was conducted in 2010, after the global fi nancial crisis of 2008, and the SMEs were asked to compare their current business performance to that before the fi nancial crisis. Figure 4.1 shows that 50% of the surveyed SMEs in the Import and Export Trade cum Manucturing sector saw a decrease in sales make up 50.0% of all enterprises (corresponding fi gures for profi t is 62.5% and for return on asset 57.2%). This shows that many of these enterprises were hard hit by the global fi nancial crisis.


57.2%

31.7%

11.1%

62.5%

21.9%

15.6%

50.0%

25.0%

25.0%

Decrease

No change

Increase




43Chapter 4

Table 4.3 shows that for those that recorded better business performance, the average percentage increase in sales, profi t and return on assets were 23.5%, 15.2% and 7.2% respectively. Table 4.4 gives the corresponding fi gures for those which recorded a decline in sales, profi t and return on assets.


Percentage increase inSales

(N=15) Profi t (N=9)

Return on assets(N=6)

Minimum 2.0% 2.0% 1.0%

Maximum 100.0% 50.0% 20.0%

Mean 23.5% 15.2% 7.2%


Percentage decrease inSales

(N=30) Profi t

(N=34) Return on assets

(N=30)

Minimum 5.0% 3.0% 1.0%

Maximum 50.0% 80.0% 100.0%

Mean 24.1% 20.6% 20.4%

44


Chapter 4

4.3 Three-year Business ProjectionThe SMEs surveyed were asked to make forecasts for the next 3 years. Figure 4.2 shows that 44.9% of the SMEs sampled held optimistic or very optimistic outlook of their business and only 5.8% were pessimistic or very pessimistic while almost half of them (49.3%) remain neutral.


3.3%

65.0%

31.7%

10.3%

48.5%

41.2%

10.2%

62.3%

27.5%


No change


In Hong Kong (N=69)


Overseas (N=60)

N=69

5.8%

49.3%

44.9%

Very optimistic / Optimistic

Neutral


The SMEs were also asked to project future expansions in Hong Kong, mainland China and overseas respectively (Figure 4.3). Findings reveal that 41.2% of the surveyed SMEs would plan to expand their operations in mainland China, while only 27.5% plan to expand in Hong Kong in the coming three years. Figure 4.4 shows that more than half of them (52.9%) plan to develop new markets.


45Chapter 4


N=51

47.1%

52.9%



46


Chapter 4

4.4 Factors Infl uencing the Current BusinessThe responding SMEs were presented with eight external factors deemed to have impact on business. Overwhelmingly, policies of the mainland government is considered of greatest impact with 80.6% rating this factor of signifi cance or of great signifi cance. This is followed by 67.2% for the factor fl uctuations of exchange rates and 54.5% for debt crisis in Europe, as shown in Table 4.5.



SMEs rating the specifi c factor to be of great

signifi cance or of signifi cance








5 9.3%


2 3.6%


47Chapter 4

Table 4.6 below shows factors that were unclear to the responding SMEs. Top of the list are CEPA policies, Pan-Pearl River Delta development ( ) and the establishment of the free trade zone between China and ASEAN. This shows the need for SMEs to be kept well informed and educated about new development in the macro economic and business environment and policies.





14 20.3%


48


Chapter 4

4.5 Diffi culties in Doing Business in Hong KongRespondents were asked to assess a list of six factors that present diffi culties in doing business in Hong Kong. Top of the list is RMB exchange rate fl uctuations 76.8% of the SMEs in the Import and Export Trade cum Manufacturing sector considered this a serious or extremely serious problem as indicated in Figure 4.5. Down on the list are fl uctuation of market conditions5, loss of competent employees and rising rental costs. They were also considered as the major problems for these SMEs. These concerns are to be addressed if SMEs are to thrive.


26.9%

31.3%

46.3%

47.1%

55.1%

76.8%


RMB exchange rate fluctuations (N=69)

Fluctuation of market conditions (N=69)





1

5 Subject to external economic conditions

49Chapter 4

4.6 Diffi culties in Doing Business in Mainland ChinaSimilarly, respondents were asked to assess factors that present diffi culties in doing business in the mainland. As shown in Figure 4.6, the fi rst two on the list are costs-related, including rising raw material costs and rising wages. But many SMEs are also concerned about the implementation of labour contract law, unclear policy, shortage of factory workers, the introduction of environmental protection laws and regulations, and the effectiveness in implementing laws and regulations. All these show that businesses are exposed to higher costs when doing business in China.


28.4%

31.8%

41.8%

45.6%

58.2%

63.2%

70.6%

72.1%

74.6%

88.2%

92.6%



Rising wages (N=68)










50


Chapter 4

4.7 Coping Strategies Adopted by Hong Kong SMEs in Import and Export Trade cum Manufacturing Sector

The study made an attempt to look at the strategies adopted by SMEs to cope with the challenges and the effectiveness of these strategies.

Overwhelmingly, SMEs in the Import and Export Trade cum Manufacturing sector have adopted market development strategies rather than cost-cutting strategies. These include developing new markets, product development and production process improvement through R&D, brand development, and increase in employee benefi ts and training programs, with high percentages of 81.2% to 91.3%. However, less than half of the SMEs that adopted these strategies found them effective or very effective, except 52.4% for develop new product or services through R&D.




strategyPercentage













51Chapter 4


Adopted StrategyNumber of SMEs

which fi nd the strategy effective

Percentage








Relocation ( ) (N=22) 7 31.8%





52


Chapter 4

4.8 Awareness and Effectiveness of HKSAR Government Schemes for SMEsTable 4.9 shows that many of the responding SMEs are not aware of HKSAR government schemes designed to assist SMEs. For example, 52.2% of them are not aware of the SME Business Installations and Equipment Loan Guarantee Scheme, 42.0% of them are not aware of the Manpower training and development and R&D Cash Rebate Scheme. Table 4.10 shows the that for those who are aware of the schemes, they found some of them effective, such as the SME Export Marketing Fund, SME Loan Guarantee Scheme and SME Development Fund. There is room for improvement to publicise and make these government schemes known to SMEs and to design more effective schemes to meet the needs of SMEs in Hong Kong.




Percentage











Percentage








53Chapter 4

N=69

31.9%

33.3%

34.8%

36.2%

46.4%

49.3%

52.2%

58.0%

60.9%











4.9 Government Support for the Sustainable Development of SMEsFigure 4.7 lists, in order of priority, areas where the surveyed SMEs think HKSAR government can assist them. Top of the list are providing tax relief, gaining access to mainland markets and expanding coverage of RMB exchange scheme, followed by facilitating market promotion and providing useful market information, assistance in gaining intellectual property rights and subsidy for R&D activities. All these show that SMEs in Hong Kong are in need of acquiring specialised knowledge that is outside the capability of SMEs, and this is best provided by a centralised body through the government.

Figure 4.7 Areas of Support by HKSAR Government to Assist SMEs Sustainable Development


54

N=69

49.3%

52.2%

53.6%

56.5%

56.5%

76.8%Simplify approval and regulatory procedures






Figure 4.8 shows areas of major concerns regarding Hong Kong SMEs development in the Mainland. SMEs would highly appreciate assistance in simplifying approval and regulatory procedures which is crucial to doing business in China. Related problems such as gaining more access to mainland markets, protection of the intellectual property rights and expanding the coverage and volume of RMB settlement and RMB capital fl ow will also need to be addressed.

Figure 4.8 Areas of Concern to be Addressed by Mainland Government

4.10 SummaryFindings of the survey show that about 45% of the 69 SMEs in the Import and Export Trade cum Manufacturing sector were optimistic or very optimistic about their business prospect in the next three years, and only 5.8% were pessimistic or very pessimistic with the rest being neutral. Although a signifi cant number of them felt that the outlook is positive, nevertheless, they all faced many challenges, including rising rental, raw material and labour costs, exchange rate fl uctuations, fl uctuation of market conditions, staff turnover, unclear government policies, access to bank loans, etc.

Chapter 4

55Chapter 5

Chapter 5Hong Kong SMEs in the Manufacturing Sector

This chapter presents the fi ndings of 64 SMEs surveyed in the Manufacturing sector.

5.1 Profi le of the Surveyed SMEs in the Manufacturing SectorThe 64 SMEs in the Manufacturing sector which responded to the survey are engaged in the following industries: biochemical technology, food, electronic & electrical appliances, machinery & equipment, jewellery, fabricated metal products, plastic, printing & publishing, textile & garments, toys, watches & clocks, automobiles, furniture, bedding and baby products, shoes, etc.

Table 5.1 shows that 84.4% of the responding SMEs employ 50 or fewer employees while only 15.6% employ more than 50 staff in Hong Kong.



100 5 7.8%Total 64 100.0%

About 67% of the SMEs surveyed have been in operation for more than 15 years, 25% for 6-15 years, and only 7.8% for less than 5 years (Table 5.2).



15 43 67.2%

Total 64 100.0%

56


Chapter 5

50.9%

41.8%

7.3%

62.3%

23.0%

14.8%

46.0%

19.0%

34.9%

Decrease

No change

Increase



5.2 Business PerformanceThe survey was conducted in 2010, not long after the global fi nancial crisis of 2008, and the SMEs were asked to compare their current business performance to that before the fi nancial crisis. Figure 5.1 shows that 46% of the responding SMEs had a decrease in sales over the period and 62.3% of them found their profitability dropped. The corresponding figure for return on assets was 50.9%. It would appear the 2008 fi nancial crisis adversely affected many of these SMEs in the Manufacturing sector.


57Chapter 5

Table 5.3 shows that for those SMEs that recorded better business performance, the average percentage increase in sales, profi t and return on assets were 20.7%, 81.1% and 15% respectively. Table 5.4 gives the corresponding fi gures for those that recorded a decline in sales, profi t and return on assets.



Sales (N=18)

Profi t (N=8)


Minimum 5.0% 1.0% 5.0%

Maximum 70.0% 500.0% 20.0%

Mean 20.7% 81.1% 15.0%



Sales (N=27)

Profi t (N=34)


Minimum 5.0% 5.0% 2.0%

Maximum 80.0% 100.0% 102.0%

Mean 28.3% 29.3% 31.0%

58


Chapter 5

5.3 Three-year Business ProjectionThe SMEs surveyed were asked to make forecasts for the next 3 years. Figure 5.2 shows that 42.2% of the SMEs sampled held optimistic or very optimistic outlook of their business, 37.5% remained neutral, and 20.3% were pessimistic or very pessimistic about their business performance.


These SMEs were asked to project future expansions in Hong Kong, mainland China and overseas respectively (Figure 5.3). The fi ndings show that the tendency is for enterprises in the Manufacturing sector to plan to expand in mainland China (41.9%) and overseas (34.5%) in the coming three years.


N = 64

20.3%

37.5%

42.2%Very optimistic / Optimistic

Neutral


7.3%

58.2%

34.5%

17.7%

40.3%

41.9%

14.3%

71.4%

14.3%


No change


In Hong Kong (N=63)


Overseas (N=55)

59Chapter 5

Figure 5.4 shows the SMEs that plan to expand their operation in the next three years. About two-thirds of them plan to develop new markets, and they identifi ed overseas locations such as Southeast Asia, ASEAN regions, Philippines, Vietnam, Thailand, Indonesia, etc.


N=45

35.6%

64.4%



60


Chapter 5

5.4 Factors Infl uencing the Current BusinessThe responding SMEs were presented with eight external factors deemed to have impact on business. Overwhelmingly, policies of the mainland government is considered of greatest impact with 83.3% rating this factor of signifi cance or of great signifi cance. This is followed by 56.7% for the factor fl uctuations of exchange rates and 40.4% for RMB clearing and settlement procedure, as shown in Table 5.5. This fi nding is consistent with the fact that many SMEs are engaged in mainland-related businesses and these would be their main concern.











7 13.7%


6 13.6%


61Chapter 5

Table 5.6 below shows factors that were unclear to the responding SMEs. Top of the list are 29.0% who were unclear about Pan-Pearl River Delta development ( ), followed by CEPA policies and the establishment of the free trade zone between China and ASEAN. This shows the need for SMEs to be kept well informed and educated about new development in the macro economic and business environment and policies in mainland China.




18 29.0%



62


Chapter 5

19.0%

27.9%

38.3%

44.3%

50.8%

68.8%


MB exchange rate fl uctua ons (N=64)

Fluctua on of market condi ons (N=61)





5.5 Diffi culties in Doing Business in Hong KongRespondents were asked to assess a list of six factors that present diffi culties in doing business in Hong Kong. Top of the list is RMB exchange rate fl uctuations 68.8% of the responding SMEs considered this a serious or extremely serious problem as indicated in Figure 5.5. Fluctuation of market conditions, loss of competent employees and rising rental costs were also considered by many SMEs as serious or extremely serious problems. These concerns are to be addressed if SMEs are to thrive.


63Chapter 5

5.6 Diffi culties in Doing Business in Mainland ChinaSimilarly, respondents were asked to assess factors that present diffi culties in doing business in the mainland. As shown in Figure 5.6, the fi rst two on the list are costs-related, including rising raw material costs and rising wages. But more than half of them are also concerned about the implementation of the labour contract law, clarify of policy, shortage of factory workers, effectiveness in implementing laws and regulations, and the implications of environmental protection laws and regulations. All these go to show that it is becoming more challenging for SMEs in Hong Kong to run their businesses in mainland China.


21.7%

33.3%

42.6%

42.6%

55.6%

56.5%

68.3%

68.9%

76.2%

79.4%

85.7%



Rising wages (N=63)










64


Chapter 5

5.7 Coping Strategies Adopted by Hong Kong SMEs in Manufacturing Sector The study tried to look at the strategies adopted by SMEs to cope with the challenges and the effectiveness of these strategies. Overwhelmingly, SMEs in the Manufacturing sector have adopted market development strategies rather than cost-cutting strategies. These include developing new markets, brand development, production process improvement and product development through R&D. Over 90% of them would develop new markets, and over 80% of them would increase employee benefi ts and spend more on R&D (Table 5.7).




strategyPercentage













65Chapter 5

As shown in Table 5.8, over 50% of those who adopted the strategies on R&D, outsourcing, restructuring, and brand development found them effective or very effective. This is an encouraging fi nding as it shows that Hong Kong SMEs are making good efforts to build competitive advantage.

To cope with challenges, SMEs that adopted strategies such as reducing the number of employees, relocation, localisation, horizontal and vertical integration and found them effective are only in the region of 30%.


Adopted StrategyNumber of SMEs which fi nd the

strategy effectivePercentage








Relocation ( ) (N=20) 7 35.0%





66


Chapter 5

5.8 Awareness and Effectiveness of HKSAR Government Schemes for SMEsTable 5.9 shows that a signifi cant percentage of responding SMEs are not aware of HKSAR government schemes designed to assist SMEs. For example, 64.1% are not aware of the R&D Cash Rebate Scheme, 51.6% are not aware of the SME Business Installations and Equipment Loan Guarantee Scheme and 46.9% do not know about the SME Development Fund. These schemes would be of direct relevance to the enterprises in the Manufacturing sector. Table 5.10 shows that most of the SMEs that are aware of the schemes did not consider them effective. There is much room for improvement to make these government schemes known to SMEs and to design more effective schemes tailored for the needs of SMEs.




Percentage










Number of SMEs which found the scheme

effectivePercentage








67Chapter 5

5.9 Government Support for the Sustainable Development of SMEs Figure 5.7 lists, in order of priority, areas where SMEs in the Manufacturing sector think HKSAR government can assist them. More than half of them would consider access to mainland markets, tax relief and subsidy for R&D activities us

the road to sustainable development of hong kong … kong general chamber of small and medium...

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